Blues for Greenbacks

By Robert Lekachman; Robert Lekachman is Distinguished Professor of Economics at the Lehman College campus of the City University of New York and authBy Robert Lekachman; Robert Lekachman is Distinguished Professor of Economics at the Lehman College campus of the City University of New York and authFebruary 22, 1981

PROBABLY THE BEST WAY to contemplate the American economy is in Paper Money's tone of civilized irony, particularly since the most plausible alternative is acute melancholia. In happier days "Adam Smith", a.k.a. George J. W. Goodman -- journalist, editor, fund manager, and man about bankers, economists, tycoons, stock market gurus, and oil sheikhs -- wrote The Money Game , the classic account of the go-go years of the great bull market in the early 1960s. After bears routed bulls, our man was back in a somewhat less exuberant vein with Supermoney .

An enormously skillful writer who makes clear and entertaining such deadly topics as the Beta coefficient strategy of stock investment, the theory of "efficient" markets, the clever way that the Federal Reserve and the commerical banks collaborate to pump up money and credit, and the arcana of Eurodollars, Goodman approaches inflation, slow growth, flagging productivity, and persistent disarray among the economic forecasters with wit, the seasoning of anecdote and personality, and repeated disclaimers that reading his book will put anyone on the road to riches.

As he identifies the antecedents of this time of troubles, living standards steadily rose for nearly a generation after the end of World War II because energy was abundant and cheap, the dollar as the globe's dominant currency enacted the same reserve role as once did the pound sterling, the United States granted Marshall Plan and other aid to Europe, Japan, and much of the Third World, and Keynesian commitments to full employment limited the scope of recession and stimulated the optimism of investors.

Economic policy began to deteriorate in the second half of the 1960s when Lyndon Johnson sought desperately to preserve his infant Great Society and simultaneously wage a covertly expanding war in Vietnam. Much too late he asked for higher taxes to curb incipient inflation and after more delay Congress grudgingly enacted the 1968 surcharge. After mid-1965 inflation stirred and accelerated ominously toward the 5 percent which greeted Richard Nixon in January 1969. That number points to the sharp contrast between the 1960s and 1980s. To complacent Americans accustomed to apparently stable prices forever and ever, 5 percent inflation was alarming. We should be grateful and astonished to reduce current double-digit inflation to anything like 5 percent.

Nevertheless, the disorders of the late 1960s and the first years of the next decade were gentle overtures to the transformation of the world's pecking order orchestrated by OPEC. The numbers -- OPEC's annual tribute, the balance-of-payments deficits of oil importing countries, and the $100 billion American oil bill -- are so enormous as almost to drain their beholders of effect. The new economic order is symbolized by the simple recollection that in the autumn of 1973, a barrel of Mideastern oil sold in world markets for $1.80 and cost perhaps 10 cents to pump from a Saudi Arabian well. As I write, oil sells for $37 per barrel or more and the "moderate" Sheikh Yamani predicts $50 oil by spring. It helps not at all that the United States imports a steadily rising percentage of the oil which heats our houses and propels our cars.

Some of Paper Money's best pages deal with the genesis of OPEC and Saudi politics and sociaology, as well as the mechanisms of recycling. Rich countries finance their oil bills by selling tanks, fighter planes, machinery, factories, harbors, and telephone systems to OPEC. Poor countries without oil must borrow somewhere to pay the oil bills. If the universe were rationally ordered, OPEC would lend the money out of its bulging profits. Not unnaturally, its members prefer to deposit their winnings in European and American banks. These banks then lend many billions of dollars to Turkey, Peru, Brazil, Zaire, South Korea, and a lengthy list of other shaky societies. They ship the proceeds to OPEC. This recycling process preserved international trade and finance during two major oil price shocks in 1973-74 and again just last year. Goodman has his doubts that the shaky international system can survive a third shock -- another doubling or tripling of price. Too many Zaires will default. Too many of the world's leading banks will go broke in their wake.

If OPEC is the proximate occasion for intractable inflation, that inflation continues because by now there is an enthusiastic constituency of homeowners with a vested interest in endlessly rising prices for their major asset. Real estate has been the great middle-class hedge against the declining purchasing power of paper money. If the air leaks out of the Great Real Estate Bubble, millions of families would endure major financial loss.

Is there any hope? Goodman in the end is far from cheerful. As others have said, we need a revival of the Calvinist virtues of thrift and hard work and, into the bargain, a national consensus about the distribution of burdens required to launch a serous assault upon inflation. Goodman quotes Arthur Burns, Nixon and Ford's chairman of the Federal Reserve, as sighing. "If only life would quiet down for a while." Small chance. However, Goodman's bad news is delivered in prose it is a pleasure to read. As the movie ads promise, you will laugh, you will cry, you will be glued to your seat.